Retirement Savings & Income Planning - Module 1

ERISA requirements for qualified plans include:

- Reporting and disclosure

- coverage

- vesting

- participation

- fiduciary requirements.

If a qualified DC retirement plan is found to meet the requirements under ERISA & IRS regulations, the following is true:

- Employees are not taxed on plan contributions or earnings attributed to plan contributions as long as a plan distributions does not occur

- a 2 years of service eligibility requirement is permitted if 100% immediate vesting is also used

- Employees do not petition the IRS for acceptance of the plan

- No defined contribution plans are eligible for PBGC coverage

Pension Benefit Guaranty Corporation (PBGC)

- PBGC may initiate an involuntary distress termination proceedings if a pension plan is unable to pay benefits when they become due

- PBGC-guaranteed benefits exclude medical insurance benefits, benefits in excess of the PBGC limit, and lump-sum benefit payments

- Premiums for PBGC coverage are determined from the benefits being paid out and the vested retirement benefits of the other participants

- Only defined benefits plans are generally required to pay PBGC premiums

Permitted Disparity Rules

- A DB & DC plan may be an excess method plan

- A DB plan may be an offset method plan, DC CANNOT

The purpose of integrating a qualified retirement plan with Social Security is to

Allow a higher contribution rate for highly compensated employees than for non-highly compensated employees

In a section 401(k) plan, which of the following must be considered in complying with the maximum annual additions limit?

I. employee after tax contributions

II. catch contributions for an employee age 50 or older

III. dividends paid on employer stock held in a section 401(k) plan

IV. employed qualified none elective contributions

I & IV

Catch-up contributions are not counted against the annual additions limit.

Earnings on plan investments are not taken into account when computing the maximum annual additions limit

Jeff wants to establish a qualified plan for his business to provide employees of the company with the ability to save for retirement. Which of these plans is a qualified plan?

A. Profit-sharing plan

B. SEP plan

C. Section 457 plan

D. SIMPLE IRA

A. Profit-sharing plan

Only the profit-sharing plan is a qualified plan. The SIMPLE IRA and the SEP plan are tax-advantaged plans, and the Section 457 plan is a non-qualified deferred compensation plan.

Which of these statements regarding qualified retirement plans is correct?

I. Money purchase plans, employee stock ownership plans (ESOP), target benefit, plans, and stock bonus plans are all examples of qualified retirement plans.

II. Top-hat plans and cash balance plans are examples of qualified retirement plans.

I only

Top-hat plans are nonqualified, deferred compensation plans. A cash balance plan, however, is an example of a qualified plan.

Which of these plans do not allow the excess method of permitted disparity?

A. SEP

B. Money purchase plans

C. ESOP

D. DB plans

C. ESOP

All plans are allowed to integrate with Social Security except ESOPs, SIMPLEs, and SARSEPs. The excess method is allowed for all plans allowing integration, whereas the offset method is only allowed for defined benefit plans.

The permitted disparity (Social Security integration) rules for qualified plans

The permitted disparity level must be reduced if a participant retires early. It is no longer possible to have an integrated excess plan that does not provided any benefits (or contributions) to employees with wages below the integration level. This was permitted under prior law. The excess benefit percentage is calculated on a per-year-of-service basis (over a maximum of 35 years.) The integration level selected cannot exceed the current year's taxable wage base; however, it may be less.

If a qualified DC retirement plan is found to meet the requirements under ERISA & IRS regulations, which of these statements is correct?

Employees are not taxed on plan contributions or earnings attributed to plan contributions as long as a planplan distribution does not occur

Joe has worked for XYZ Co. for 30 years and is a participant in his employer's traditional DB plan. He is retiring this year. The plan formula provides a pension equal to the average of the participant's final three years of compensation. Joe's final three years of compensation were $320,000, $340,000, and $400,000.

What will be the amount of Joe's pension under the plan in 2026?

$290,000

Applying the 2026 covered compensation limit of $360,000, Joe's final three years of compensation averages to $340,000. However, the maximum DB pension payable from a traditional DB pension plan is $290,000 (2026).

Vesting schedules that may be used to accrue qualified defined benefit plan benefits attributable to regular (non-top heavy) employer contributions

100% cliff vesting after 5 years of service

3 to 7 year graded vesting schedule

In the ratio test used to determine whether qualified plan is nondiscriminatory, what is the minimum percentage of nonhighly compensated employees who must be covered as compared to the percentage of covered highly compensated employees?

70%

LeRon Davis earns $300,000. His company has a 7% money purchase plan. How much will be contributed to his account in 2026? The company uses the social security taxable wage base of $184,500 as the integration level.

$27,584

First, $300,000 is less than the includible compensation limit. Thus, all $300,000 must be considered.

The first $184,500 gets $12,915 (7% of $184,500).

Next, the remaining $115,500 ($300,000 - $184,500) gets a 12.7% excess contribution percentage. This is the base contribution percentage of 7% + the lesser of 7% and 5.7%. $115,500 x 0.127 = $14,669. So, $12,915 + $14,669 = $27,584.

Susan makes $400,000 working for Great Grapes, Inc. She defers 4% into the 401(k) and receives the 4% match. How much will go into her account in 2026? Susan is not a HCE due to the company making the 20% election and the fact that she has no ownership of the company.

A. $28,000

B. $32,000

C. $24,500

D. $30,400

D. $30,400

Worker contributions are based on their actual pay until they reach the maximum employee contribution for the year. $16,000 ($400,000 x 4%) is less than the worker contribution limit and she is not an HCE, so contributing $16k is okay. On the other hand, the employer is limited to the maximum annual compensation limit ($360k).

$360,000 x 4% = $14,400

$14,400 + $16,000 = $30,400

if a defined contribution plan is top-heavy, the required minimum employer contribution is usually equal to what percentage of each nonkey participant's compensation?

3%

Unless the key employees are receiving less than 3%. If that were the case the nonkey employees must get at least what the key employees are receiving.

Who of these is a fiduciary for the XYZ qualified Plan?

I. Joe, the administrator

II. Bill, the investment manager

III. Mary, a CFP, and the paid investment adviser

IV. Ralph, the XYZ owner

I, II, III, & IV

All of these people are fiduciaries

Velvet Lawns, Inc., employs 26 full-time workers and provides a money purchase plan for eligible employees. All 26 employees are plan participants this year. Jack, the owner of the company, has an account balance of $134,000. The total of the account balances of all plan participants amounts to $215,000.

The plan must comply with requirements for minimum contributions to non-key employees.

The coverage and nondiscrimination tests would be passed. The plan would, however, be top heavy (Jack's $134,000 account balance is 62% of the $215,000 total of all account balances). Top-heavy plans must comply with minimum contribution requirements for non-key employees and uses a top-heavy vesting schedule. All defined contribution plans are now required to vest no less rapidly than three-year cliff or two-to six-year graded.

Which of these statements regarding Social Security plan integration is true?

A. Under the offset method of integration, a fixed or formula amount reduces the plan formula.

B. The maximum increase in benefits for earnings above covered compensation level is 5.7% for a defined benefit plan.

C. Only the excess method can be used by defined benefit plan.

D. Because there is a disparity in the Social Security system, all retirement plans are allowed to integrate with Social Security.

A. Under the offset method of integration, a fixed or formula amount reduces the plan formula.

Ryan, who is 50, is employed by Best Mutual Funds (BMF) and participates in its profit-sharing section 401(k) plan for this year. The plan allocates contributions based on relative compensation and is not integrated with Social Security. Ryan makes $80k, and has elected to defer 5% of compensation into the section 401(k) plan. Including Ryan, 35 employees with a total includible compensation of $1.8 million participate in the plan and have elected to defer a total of $72k (4%).

The maximum deductible contribution to the profit-sharing plan BMF can make is $450,000

25% of aggregate covered payroll (25% x $1,800,000 = $450,000). Worker contributions do not count against the max deductible contribution for an employer.

ERISA requires reporting and disclosures of plan information to all of these except

A. IRS

B. Plan sponsors

C. Plan participants

D. DOL

B. Plan sponsors

ERISA requires reporting and disclosure of plan information by plan sponsors to the IRS, DOL, PBGC, and plan participants

Scott is a fiduciary of the BSB retirement plan. The entity responsible for monitoring his actions as a fiduciary is

A. ERISA

B. SPD

C. DOL

D. PBGC

C. DOL

Which of these describe differences between a tax-advantaged retirement plan and a qualified plan?

I. Tax-advantaged plans are not required to meet all the ERISA requirements that a qualified plan must meet.

II. Employer stock distributions from a tax-advantaged plan do not benefit from NUA tax treatment.

Both I and II

Which statement regarding top-heavy plan is correct?

An accelerated vesting schedule is used when a defined benefit plan is top heavy.

The Jones Corporation has a profit sharing plan with a 401(k) provision. The company matches dollar for dollar up to 5%. Pedro age 52, makes $150,000 and defers 5% into the 401(k) for 2026. The corporation has had a banner year and is considering a large contribution to the profit-sharing plan. What is the most that could be contributed to Pedro's profit-sharing account this year?

A. $57,000

B. $54,000

C. $65,000

D. $37,500

A. $57,000

The max allowed employer profit sharing contribution in this case for 2026 is $57,000. The Section 415 annual additions limit for 2026 is $72,000. However, Pedro has already contributed $7500 and this amount has been matched. Thus, $15,000 has already gone toward the $72,000 annual additions limit for 2026. Notice that Pedro is eligible for the age 50+ catch-up. However, he is the only one who can use this catch-up. The company is only allowed to take the total contribution to the annual additions limit of $72,000 in 2026.